Executive Summary Brazil and Argentina are strategically important to Europe, both as trade partners and as weighty representatives of the Global South. Despite domestic challenges, Brazil, like Argentina, is trying to exert its influence on global challenges such as climate change, food, and energy security. Brazil can take a leading global role in renewable energy sources while Argentina’s lithium reserves could cover 20 percent of global demand in 2030. Implications for International Businesses Brazil strongly engages in the production of green hydrogen and domestic demand is expected to take up about 60 percent of the total supply. This leaves room for energy exports up to $20 billion. Thyssenkrupp AG’s Nucera subsidiary together with Brazilian chemical company Unigel SA will open the country’s first industrial-scale green hydrogen plant by the end of 2023, with capacity set to grow from 60 MW to 240 MW in a second phase. The ratification of the EU-Mercosur trade deal would give European companies access to a so far highly protected market of over 260 million people. State of Play Global balancing act running into local challenges Brazil and Argentina face different domestic challenges. Both are similarly trying to stay out of the West’s fallout with Russia over the invasion of Ukraine, or the emerging global rivalry between a US-led alliance and a China-dominated bloc. Together with a majority of other Latin American countries, they currently have left-leaning governments, brought to power by popular frustration with their predecessors’ pandemic policies and overall economic stagnation. Their relative instability makes them open to outside investments, including from Europe, in areas where their companies can in turn increase global exports to generate hard currency. Increased energy and food prices worldwide, as well as Russia’s war against Ukraine disrupted Brazil’s recovery following the COVID-19 crisis. As the government had to temporarily extend federal tax breaks on fuels, it also began to promote investments around untapped deposits of fertilizers like potash to maintain the country’s status as the world’s third largest agricultural exporter. President Luiz Inácio Lula da Silva, inaugurated in January amid a deeply polarized socio-political landscape, now seeks to boost economic growth by promoting partnerships that assure joining value chains that help re-industrializing the country. For Argentina, the war further deepened an economic crisis marked by high annual inflation (already at 53.8 percent in 2019, i.e., before the pandemic) and a fiscal adjustment program administered by the International Monetary Fund (IMF). Energy import values increased by 120 percent, and the 80 percent price increase on imported fertilizer coupled with a record drought have affected agriculture and cattle exports. Ahead of an election in the fall, Argentina seeks financial and infrastructure assistance to exploit its available energy and mining sources to stabilize its economy. Key Issues What makes region a geopolitical partner for the EU In its quest to transition towards climate neutrality, the EU needs new partnerships for non-fossil energies. At the same time, it is diversifying geopolitical risks away from its dependence on Russia (until the war) and now increasingly on the Middle East. This makes Argentina and Brazil, two powerhouses for the green transition, important partners. Moreover, Latin America is a region with the lowest risk of interstate wars, along with the rest of the Americas. In the past, Europe’s impulse was to combine trade and investment with ambitious environmental, labor, and social standards, such as with the signing of the EU-Mercosur agreement in 2019. Now, ‘winning’ key green tech exporters not just for business purposes but also as strategic partners in a geopolitically contested world is crucial for the EU. The United States follows a similar logic of investing in green tech and looking for allies, thus presents itself as a competitor for the EU in terms of trade while being a partner at the geostrategic level. For example, it formed the Minerals Security Partnership with like-minded countries from Europe and Asia to ensure access to critical minerals, thus countering China’s dominance in global supply chains. Source countries, in turn, would receive loan guarantees or debt financing for mining projects. So far, however, Argentina and Brazil have refused to join the initiative, just as they have rejected Washington’s offer to replace ageing military equipment with modern American weaponry if donated to Ukraine. On his recent visit to China, President Lula went even further, asking both the US and Europe not to “encourage” the war through arms shipments. He later added a call for a “peace group” to be established without the warring partners and their supporters to mediate an end to the hostilities, basically meaning Brazil, China and other (unnamed) countries from the Global South. China, in turn, became Argentina’s and Brazil’s first trading partner in 2017 and 2009, respectively (even though the United States remains their biggest foreign investor). Both countries have been elevated to comprehensive strategic partners, the highest level that Beijing awards to a third country. Since 2005, China has financed infrastructure and energy projects there valued up to $48 billion, and Argentina became a member of the Belt and Road Initiative in 2022. However, two factors have led to a reappreciation of Beijing’s role: First, the dramatic decline of Chinese lending to Latin America and the Caribbean over the past decade, i.e., from $34.5 billion in 2010 to $807 million in 2022, though rebounding as of late. Second, rising concerns – especially in Brazil – that China’s buying up of natural resource-based products came to the detriment of its industries. This opens the door for Europe and a revived EU-Mercosur trade agreement focusing on cooperation around the green transition. Ultimately, being on good terms with large powers such as China or Russia helps Brazil and Argentina balance the United States, which is why the two countries prefer not to join a Western-led alliance to isolate Russia. In comparison, from a political point of view, Europe is seen as less overbearing and thus, less invasive. Given the EU’s more limited geopolitical clout, signing a free trade deal with the EU is far less political costly for both countries than any hypothetical trade deal with Washington. Green transition, trade, and money – the geo-economic side of the relationship Europe’s renewed interest in the region, particularly in Argentina and Brazil, is not merely driven by geopolitical considerations, but also by the requirements of the green transition. Both countries hold an abundance of minerals that are critical especially for the electrification of transports, such as lithium (Argentina is the fourth-largest producer), nickel (Brazil has the world’s second largest reserve), and rare earth elements. Other energy opportunities include the production of liquefied natural gas and hydrogen in Argentina, which boasts the second-largest shale gas reserve in the world. In Brazil, renewables like wind and solar as well as the production of green hydrogen are frontrunners, propelling the country to the world’s top ten producers of solar energy. This generates investment opportunities for European companies in steel and automobile industries, software, mechanical engineering, solar technology, waste management, and startups. Investment risks, in turn, include a weak rule of law, competition with Chinese mining companies (42,29 percent of Argentina’s lithium exports go to China), as well as local state-owned enterprises like Brazilian energy giant Petrobras that may engage in unfair competition and a high risk of sovereign debt default. The envisaged trade agreement with the EU with the Mercosur economic and political club uniting Argentina, Brazil, Uruguay, and Paraguay would be the largest such deal in latter’s history. It would give the group a boost, especially given that its actual economic integration has lagged expectations (despite a combined GDP of roughly US$2.2 trillion in 2021) while its effect on interstate peace has been considerable. In fact, the EU and Brazil are making progress on an addendum tackling sustainable development that would lift European countries’ resistance and move towards the agreement implementation. Given Argentina’s upcoming election, its stance is more delicate, so ratification – and therefore the deal’s implementation at the bilateral level – may be delayed. However, it has to be noted, that the most promising political candidates for Argentina’s election are less protectionist than the incumbent. The same is true for both countries’ bid to join the OECD club of mostly rich countries over the coming years, whose framework provides protection to European companies’ investments and fosters pro-market reforms. Most recently, Argentina and Brazil have floated the idea of monetary cooperation by establishing a local currency system between the two countries. This is a payment agreement that seeks to foster intra-regional trade through a clearing system run by the two central banks. If implemented, this update will help businesses already established in both countries to avoid capital and import restrictions currently in place in Argentina. Especially the automotive sector, valued at $6.7 billion and contributing 22 percent of exports from Argentina to Brazil and 35 percent the other way in 2020, stands to benefit from this, and with-it European carmakers such as Volkswagen, Mercedes Benz, and Renault.

Executive Summary Russia, the once-dominant supplier of oil and gas, has left the European market, with governments coupling massive subsidy programs with enhanced decarbonization targets to buffer the shock. Major supply-side contingencies for Europe include tight LNG markets as well as domestic climate policies restricting the continent’s ability to secure long-term deliveries of fossil fuels. Europe’s crisis management also entails geopolitical risks, as keeping energy prices affordable in developing countries will be crucial to maintain their support for Europe’s Russia policy. The global fallout from the energy crunch has led to the clean industrial transformation gaining speed, not least considering an emerging green race with the US, with knock-on effects for supply chain geographies across the EU. Implications for International Businesses The manufacturing and energy-intensive sectors will see a business environment marked by persistent market volatility as fossil upstream investment is bearish and renewable capacity development is trailing needs. Companies need to brace for a more interventionist approachto energy market regulation, both in light of the security premium of swift decarbonization and as the Ukraine crisis revealed the political costs of lopsided industry choices regarding their energy supply structures. The EU will put a high emphasis on (green) industrial policy, possibly at the expense of pro-market and competition policy. This may offer opportunities for businesses investing in clean solutions but alter investment conditions. State of Play A fundamental shift in energy geographies 2022 marks a fundamental shift in the European energy geography. Russia, the once-dominant supplier in oil and gas, has essentially left the EU market. After Moscow unilaterally cut gas supplies, most of the formerly 150 billion cubic meters of annual European imports from Russia were replaced by globally sourced liquified natural gas (LNG) and additional intake from Norway and other suppliers, whilst the remainder is savings. The EU, in turn, banned the import of Russian coal, oil, and oil products. Until Russia withdraws from Ukraine and ends the war, and possibly beyond, the Russian-EU energy ties built over half a century are severed. Europe is literally finding itself between a rock and a hard place, having to manage the fallout whilst rapidly changing supply structures in a tight market environment. This shift has come at a cost. With wholesale gas prices at times above €300/MWh, industry and the manufacturing sector responded by fuel switches and savings as well as by replacing energy intensive production through imports, such as ammonia. A flurry of policy initiatives – centrally here the REPowerEU plan – were put in place to reduce energy imports from Russia and to support industrial decarbonization, energy efficiency and fuel switch. Member state-level subsidy programs, albeit highly unequal in terms of scope and volume, started to shield households and industries from high energy costs – a welfare loss of some estimated EUR 800 billion of spent or pledged public money. Significant new LNG import infrastructure, by some estimates amounting to roughly 50bcm until the end of 2023, is about to expand intake capacity but also to sink costs. The 2030 renewable energy targets were significantly upgraded compared to the Fit for 55 program, and some countries like Germany moved to prioritize wind and solar capacity development over environmental concerns The crisis also revealed existing shortcomings in terms of EU cross-border energy infrastructure (e.g. in Central Eastern Europe but also on the Iberian Peninsula) as well as limits regarding energy policy, notably when it comes to energy solidarity. Key Issues Threats to Europe’s energy security remain, including from the crisis’ geopolitical effects Remarkable as the swift shift in European gas supply structures may have been, several major contingencies remain. Most importantly, LNG markets will remain tight until 2025 when US export capacity will see significant additions from the Golden Pass, Plaquemines and Corpus Christi projects presently under construction. By 2026, Qatar’s North Field East project will go online and increase the country’s annual capacity by around 50 percent. Moreover, India and China lead the way in enhancing their LNG regasification in Asia, adding to structural questions about securing gas supplies going forward. By the 2030s, Europe’s import needs are set to decrease, as a result of ambitious climate policies and additional efforts to decarbonize the energy system, the heating sector and industry. However, decarbonization pathways limit the possible time horizon to which European buyers can commit in supply contracts and puts them in a structural disadvantage. This means that Europe is facing competition from Asian growth markets which are ready to sign the long-term contracts it eschews based on its climate targets. A case in point is China’s 27-year contract with Qatar covering 108 million tons, which makes Germany’s much acclaimed 15-year deal over 2 million tons pale in comparison. Finally, the blow-up of the Nord Stream 1 and 2 pipeline systems exposed the vulnerability of physical offshore energy infrastructure to targeted attacks. Whilst not an immediate threat to Norwegian or Mediterranean pipelines, it further highlights Europe’s fragile supply structure during times of structurally tight markets and a geopolitically induced Russian supply cut. Europe will need to hedge against several geopolitical risks emerging from the political responses to the ongoing energy crisis. Two stand out: first, Europe’s LNG shopping spree ended up pricing less well-off countries out of the market. Notably Asian nations had difficulty securing LNG cargos at affordable prices in 2022 – in the case of Pakistan during times of droughts and floods. The resulting power outages were also a function of additional European coal demand replacing Russian gas. Similarly, high energy prices hit African nations hard, many of which were economically weakened in the wake of the Covid pandemic. There is also the risk of EU and G7 sanctions leading to a drop in Russian oil production, which would spike global prices despite an oil price cap on Russian crude. Again, this would over-proportionally impact on poorer countries, deteriorating their economic and political stability. Already, support for Ukraine and Western sanctions on Russia is much less pronounced outside the OECD club of mostly rich nations. Therefore, the extent to which the West manages to keep energy prices – and, consequently, also food prices – at bay will be a determining factor in the developing countries’ perception on who is to blame for the fallout of the present multi-crisis. Navigating the economic impact of high energy prices and state intervention in an emerging green race Energy prices will be higher for longer. Judged by future price dynamics, gas prices remain two or three times as high as pre-crisis long-term averages, with knock-on effects for the power market. This raises the specter of deindustrialization in Europe and is likely to put sustained pressure on public budgets to support businesses and households. Industrial and economic output remained remarkably stable across the EU in 2022. Yet, for Europe to retain a competitive industry going forward, much will depend on its ability to nurture a production model coping with higher prices, to incentivize industrial process innovation and – to this end – leverage both the presently established public funds and mobilize new financial instruments such as green bonds. This is not a given. Moreover, the transition may not happen at equal speed across Europe. Already today, most EU state aid is handed out by Germany and France. Both countries also make up more than half of the estimated €600 billion in fiscal support by European governments, with some €264 billion pledged by Berlin and €72 billion by Paris. This is susceptible to tilting the level playing field for industrial competition. Finally, the fine-grained division of labor within the EU is to be affected should the industrial core, that is Northern Italy, Southwestern Germany or the Benelux countries, offshore capacity. Equally, industrial decarbonization will alter sourcing needs, with knock-on effects for peripheral producers in Eastern and Southeastern Europe which – depending on their capacities – may fall of the supply chain. Russia’s war against Ukraine and the ensuing energy crisis have put in motion a fundamental rethink of EU energy policy, its goals and functioning. The incumbent liberal paradigm informing energy market design is severely questioned, both with a view to ensuring energy security and to successfully delivering on the EU’s decarbonization targets. The nationalization of key players in the gas and power market, including UNIPER, SEFE or EDF, as well as of energy grids (e.g., TENNET) epitomizes the more assertive role the state has acquired in 2022. Also, Western sanctions including the price cap on Russian oil mark a new era of market intervention. This extends to an emerging global ‘green race’ in strategically important sectors such as batteries and storage, clean tech or green hydrogen. The US Inflation Reduction Act (IRA), which attaches a ‘made in America’ clause to some $370 billion clean tech spending programs, caught Europe wrong-footed. Although the EU spends significant amounts of state aid, too, it mainly works through regulation by targets, rules, and directives, rather than through industrial policy. In a volte-face, Europe’s answer to the IRA, the Commission’s Net Zero Industry Act now envisions a 40 percent domestic production target for clean tech by 2030, to enhance competitiveness in green industries. Building on a strong momentum for more state intervention, the way forward is likely to be marked by a more strategic use of regulation towards key competitors, including the US but also China; a bigger state role in key industries, including through public ownership; and a shift from the EU’s emphasis on market competition to maintaining the ‘public interest’. This new market environment holds great potential for (clean) businesses at home but may also entail significant trade-offs when it comes to activities abroad, that is in competing economic blocs.

In dieser Folge spricht Dr. Timo Blenk mit Prof. Dr. Oliver della Costa Stuenkel über die politische und wirtscahftliche Lage in Brasilien und Lateinamerika. Dabei diskutieren sie sowohl über braislianische Tech Start-Ups und stratgeische Rohstoffgewinnung als auch über die Rolle südamerikanischer Staaten in der zunehmenden Rivalität zwischen China und den USA. Welche Chancen und Risiken bergern strategische Partnerschaften und Wirtschaftskooperationen mit den Ländern Südamerikas?

In dieser Folge diskutiert Dr. Timo Blenk mit dem ehemaligen hochrangigen Mitarbeiter des Bundesnachrichtendienstes und früheren Direktor des EU Intelligence Analysis Centre, Dr. Gerhard Conrad, über die Rolle von Nachrichtendiensten in den gegenwärtigen geopolitischen Konflikten. Ein besonderer Fokus liegt dabei auch auf der Region des Nahen und Mittleren Ostens.

Executive Summary India is primarily concerned with domestic economic growth rather than with foreign policy considerations. Its over-arching mind-set remains largely protectionist. To stimulate growth in a post-pandemic economy, India initiated trade talks with the EU among others. The EU aims to tackle challenges relating to trade, technology and security with India. So far, while India shares Western concerns about China, it has rebuffed Western entreaties to get her on its side vis-à-vis Russia, and Delhi continues to strategically balance competing friendships. Implications for International Business Current trade talks with the EU will signal the extent to which India is willing to open up. While constituting a vast potential marketplace, India still has a difficult business environment. Successful EU-India negotiations will increase both the level of FDI and GDP growth, but their outcome will mainly depend on Delhi’s willingness to advance market-based mechanisms. State of Play India’s international relevance is growing despite focus on the domestic economy The world’s second most populous country, India has significant economic potential and is an ever more relevant global actor. Western markets are key exports destinations, and through vehicles such as the Quadrilateral Security Dialogue, India increasingly cooperates with the West. However, historic legacies of non-alignment and India’s ties to Russia for arms supplies, place limits on such cooperation. India also shares interests with China due to their reliance on coal power and similar stances in climate change talks. Finally, while India seeks to exploit strategic synergies with other countries where possible, its priority remains domestic economic growth. Attempts to engage with India, such as Germany’s invitation to Prime Minister Narendra Modi to the G7 Summit, are welcome, but proper strategic alignment is still a long way off. Domestically, India faces significant challenges. Proposed agricultural reforms were abandoned after triggering protests by farmers. The Covid-19 lockdown highlighted the vulnerabilities of the country’s unskilled migrant workers. A recent heatwave harmed planted crops, putting food security at risk even though India has copious wheat stocks at present. Meanwhile, the ruling party’s attempt to prioritize the majority Hindu community risks a backlash from minority communities, most notably Muslims. Key Issues A new chapter to tackle EU-India trade and technology challenges While India has gradually liberalized since the 1990s, trade is still hampered by poor infrastructure, corruption, technical restrictions, and high tariffs. A recent shift towards self-reliance has led the country to adopt protective measures, including preferential treatment of local suppliers for public procurement. After the economy contracted by 7.3 percent in FY2021 due to the pandemic, the government initiated trade talks with several countries to stimulate growth. In April 2022, Australia and India signed an agreement, and in May 2022, a deal between India and the UAE came into force, both making the vast majority of goods traded bilaterally duty-free. Also in April 2022, the EU and India launched the Trade and Technology Council as a coordination mechanism to tackle challenges relating to trade, technology and security, and to overcome difficulties that hampered earlier trade talks. The two sides also plan to resume trade talks with a view to conclude them by early 2024, ramping up their relationship not least because of shared concerns about China. There are, however, numerous differences to be resolved. Indian tariffs on cars, wines and spirits remain high. Also, registration requirements for various IT and electronic products and for in-country testing for telecom network elements are concerns for the EU. While India will likely call for greater access for its professionals, the granting of visas is not an EU competency but lies with its member states. The EU has not yet recognized India as ‘data-secure’ according its own levels of data protection. One incentive for talks to include data is that India’s position is closer to the EU’s focus on consumer rights, rather than America’s preference for companies or China’s for state control. Still, the main ingredient to overcome those numerous potential impediments to the talks will be political will, or the readiness to compromise. Western efforts to get India off the fence vis-à-vis China and Russia Historically, India has seen its bilateral relationships through specific national interests rather than through overarching alliances based on shared values. Its foreign policy is characterized by an ability to maintain ties with a range of countries hostile to each other, such as Russia, Iran, and the US. Its traditions of “non-interference” in others’ affairs made India a non-threatening partner to many. During the Cold War, India began to rely on Russia for arms supplies which has created a path dependency which persists today. The West became interested in India because it feared that the India-Pakistan conflict could turn nuclear. It also recognized India’s strong economic potential and the country’s role as a bulwark against an increasingly assertive China. While India in part shares Western worries regarding Beijing, certainly in the maritime domain, its primary concern is China’s claim over Indian territory and the related border disputes. On other issues, including climate change, India aligns more with China than the West. While India’s ties with the West have intensified, they do not put the country into this camp, as demonstrated by Delhi’s recent abstentions on various UN votes relating to Russia’s invasion of Ukraine. In their engagement with India, the West appears to be playing a long game, hoping that as Indian involvement in global affairs grows, it will see that its interests are better served by siding with the West. Both sides of the Atlantic are engaging with India on issues such as security and trusted technology. Whether the Trade and Technology Council serves to increase the EU’s “offer” to India will be one marker of success. Already in 2021, India and the US agreed on a global strategic partnership, though no formal alliance. In sum, Western engagement with India falls far short of an over-arching strategic alignment. A further potential impediment includes India’s domestic policy, in particular its treatment of religious minorities – notably Muslims but also Christians. In addition, India is simultaneously pursuing free trade talks

Executive Summary President Erdogan’s unorthodox economic policies continue to devalue the Turkish lira, precipitating a two-decade high of inflation and a low in net international reserves. Ankara’s ongoing balancing act over Russia’s war in Ukraine, its heavy-handed attempt to extract concessions for unblocking NATO enlargement, and its efforts to improve relations with Middle Eastern and African countries signal a further shift away from the West. The authoritarian president squarely focuses on shoring up public support for the 2023 election. Implications for International Business The risk of sovereign default or the introduction of capital controls spook investors, even as the lira’s weakening depresses asset prices, thus providing investment opportunities. Russian financial inflows into Turkey and the potential for U.S. and EU sanctions create compliance risks and burdens for Western companies. Ankara’s economic outreach to the Middle East and Africa helps to make the country a regional hub for multinational companies active in those regions. State of Play Economic Headwinds Spell Trouble for Erdogan Ahead of Turkey’s June 2023 presidential and parliamentary elections, President Erdogan has kicked off a long campaign. As his plan to turn the economy around by lowering interest rates has so far backfired, he is set to fuel polarization at home and pursue adventurist policies abroad to regain disgruntled voters. Already, his unorthodox policy to keep Turkey’s benchmark lending rate at 14% has led to the lowest real interest rate globally, of minus 60%, due to sky-rocketing inflation halving the Turkish lira’s value over the past year. Ankara’s foreign and security policy moves exacerbate the country’s macro risk. Another attack on Washington’s Kurdish partners fighting the Islamic State in northern Syria could trigger the reintroduction of US sanctions first implemented following an earlier cross-border military operation in October 2019. Similarly, taking steps to annex Northern Cyprus or acting on threats against Greek islands in the Aegean would expose Ankara to further EU measures last extended in November 2021 for Ankara’s unauthorized gas drilling in the Eastern Mediterranean. Finally, Turkey’s ongoing balancing act between Russia and Ukraine and its 40-day opposition to Finland’s and Sweden’s respective NATO membership bids have further strained relations with the West. Key Issues Turkey’s Foreign Policy Estranges Its Western Allies In power for nearly two decades, Erdogan is keener than ever to act internationally without restraints from NATO allies and transatlantic values. Such a geostrategic reorientation serves two interlinked ideological purposes. While Erdogan continues to challenge the Western-led international order abroad, he hopes to hasten the religious-political transformation of Turkish society at home. The Turkish president sees the US withdrawal from Afghanistan and Russia’s invasion of Ukraine as developments underlining Turkey’s geostrategic importance. To him, they constitute opportunities to bolster his leadership credentials by taking unilateral action in the Aegean and Syria and extracting concessions from the West, such as the lifting of various arms sales restrictions, particularly for the transfer of F-16 fighters. Perceived opportunities abroad and an unprecedented fall in voter support for Erdogan’s Islamist-rooted Justice and Development Party at home exacerbate risks of an adventurist foreign and security policy to create a rally-round-the-flag effect. While nationalist policies may offer some remedy for the growing economic grievances of the Turkish electorate, they are sure to further alienate Western allies. The Turkish security establishment, which has a growing recognition of the threat posed by an expansionist Russia, would prefer a turn away from Moscow for a realignment with the West, but they do not have sufficient leverage to shape Erdogan’s course of action. The political elite is also increasingly frustrated by the country’s economic downturn, in part triggered by its drift away from the West. But, Erdogan appears more interested in using this crisis to cash in by attracting Russian capital, extracting deals from the West, and continuing his balancing act between the Kremlin and NATO. Turkey Eyes Economic Opportunities in the East and the South Erdogan’s recognition of Turkey’s growing isolation in the Eastern Mediterranean and the Middle East as well as his pressing need for trade with and investment from these regions have led to a significant policy change toward the East and South. Ankara felt threatened by its exclusion from the East Mediterranean Gas Forum in 2019 and by deepening diplomatic and security cooperation between Cyprus, Egypt, Greece, Israel, and the Gulf states. Therefore, Turkey has begun to mend ties with Egypt, Israel, Saudi Arabia, and the UAE over the past year, including visits at the highest levels and some initial attempts at diplomatic and security cooperation. On the economic front, Ankara’s normalization initiatives have not only led to these countries easing some of their recent trade restrictions against Turkey but also a $5 bn swap deal with the UAE and a Saudi-Turkish declaration of a “new era of cooperation”. The political price Erdogan had to pay for this rapprochement was to distance himself from Islamist movements in the region, such as the Muslim Brotherhood and Hamas. He also had to strengthen counter-terrorism cooperation with Israel, especially against Iran, and stop holding the Saudi leadership accountable for Jamal Khashoggi’s murder. In Erdogan’s view, this is a small cost if the diplomatic and economic dividends of normalization help him reverse the Turkish economy’s meltdown and win the elections next year. Once having pocketed a renewed five-year mandate, he could reorient his regional policies again. Meanwhile, Ankara is also actively looking for additional economic and political opportunities in Africa, aiming to open its room for maneuver beyond the confines of the Western world. Turkish companies have a growing footprint and logistical capacity in the continent, including a 14-year concession to rehabilitate and operate Somalia’s Mogadishu port. Turkey’s volume of trade with sub-Saharan Africa reached the $10 bn milestone in 2021. If the Turkish government stopped seeing the West as an adversary as it does now despite forming an alliance through NATO, Turkish companies’ knowhow, and Ankara’s political influence.

Executive Summary High food and energy prices add to socio-economic pressures in the Maghreb, as a lack of structural reforms limits the region’s potential to benefit from the Ukraine war in energy and manufacturing. After a year of democratic backsliding and a recent constitutional referendum, Tunisia is particularly ill-equipped to face price pressure. Morocco and Algeria look more stable but are also conflict prone. The war in Ukraine underscores the Maghreb’s strategic importance for the EU: from gas imports to business relocations to focusing resources on conflict management in the Western Sahara. Implications for International Business Algeria’s potential as alternative energy supplier for Europe, combined with the government’s new investment code, increases the country’s attractiveness for international investors. Morocco, and to a lesser extent Tunisia, position themselves as key players in renewables, but political and social instability look set to deter international investors. The Maghreb’s strategic position as a gateway to Europe and Sub-Saharan Africa offers consequential business opportunities amid the war in Ukraine, especially in manufacturing. State of Play Russia’s war on Ukraine hurts Maghreb States’ imports and budgets The Maghreb is strongly impacted by the Russian attack against Ukraine. Tunisia is most vulnerable. It depends on wheat imports and is exposed to global prices as a net energy importer. Tunisia’s precarious public finances and high unemployment rate further weaken its ability to absorb shocks, as the government finalizes an austerity program with the IMF. Along with an increase of presidential powers after the constitutional referendum on 25 July, based on low turnout, this makes growing popular discontent more likely. Morocco, traditionally less reliant on wheat imports, currently suffers from disruptions in domestic production due to a severe drought. In response to high inflation and widespread protests earlier this year, the government increased energy subsidies. Although Algeria is affected by rising food prices as it imports most goods, it benefits from the rise in global energy prices as a major supplier. To curb social unrest, the government has suspended tax increases and is considering not to pursue planned subsidy reforms. Continued turmoil in Libya poses an additional security risk to its Maghreb neighbors. Key Issues Great power competition in the Maghreb adds to the region’s strategic importance The Maghreb has historically had strong ties with the West, especially Europe, on issues of security, counter¬terrorism, migration, and trade. As a result of the war in Ukraine, the region’s strategic importance is growing, mainly in security and economic terms. While the EU works to reduce its energy dependency on Russia, Maghreb states are important allies to win and keep. With its energy resources, Algeria is a key strategic partner for the West, particularly for Spain and Italy, which import gas directly from there. Both Russia’s and China’s engagement in the Maghreb adds to the region’s strategic importance for Europe. Russia’s relations with the Maghreb focus on economic and security interests, with an emphasis on energy, agriculture, and tourism in Morocco and Tunisia. Algeria, in turn, is Russia’s third largest arms importer. Russian involvement is also driven by the ambition to become a major player across Africa, and the Maghreb states are a gateway to the Sub-Saharan region). China shares this ambition and has invested in digital and tech initiatives, as countries such as Tunisia and Morocco became home to major Digital Silk Road projects. Morocco has begun to strengthen ties with the West by joining the Abraham Accords and recognizing Israel as the fourth Arab country. Besides migration, Morocco is a key partner in renewable energy, which is crucial for Europe’s energy transition. Increasingly, however, the conflict between Morocco and Algeria over Western Sahara interferes with Europe’s short- and long-term needs. Rabat recently won US recognition of its sovereignty over this territory and Spanish support for its autonomy plan. Algeria, in turn, suspended a two-decade friendship treaty with Madrid, even threatening to stop its supply of gas. This, however, is unlikely for two reasons: First, Algiers wants to position itself as a reliable partner to Europe, and second, it relies heavily on exports earnings to ensure domestic political and social stability. The country’s diplomatic proximity to Russia renders the Western Sahara conflict a geopolitical issue to focus on for the West, especially as Russia has abandoned its neutral position and sent signals of support to the nationalist liberation movement. Algeria thus appears to be trying to leverage its energy supplies for political support. Structural problems limit the region’s potential for European manufacturing Morocco and Tunisia have directly benefited from the supply-chain distribution in the automotive industry, as some manufacturers moved their production there following the war in Ukraine. For instance, Japanese car parts suppliers Yazaki and Fujikura shifted part of their fabrication to Morocco and cable supplier Leoni Wiring Systems moved to Tunisia. Manufacturing relocations could take place in the aeronautic, textile or agribusiness industries, where the two countries have strong competitive advantages due to their geographic location, skilled and cost-effective labor force, and know-how. Both countries also have great renewable energy potential. They began to expand their capacity by investing in the necessary infrastructure, adopting a regulatory framework to promote investment and facilitate public- private partnerships through tailored financing mechanisms. However, EU countries have yet to officially promote investments in these states as part of the European Green Deal strategy. In addition, the three Maghreb governments have made efforts to encourage FDI by providing financial and land incentives, streamlining procedures, and creating opportunities for public-private partnerships. Nevertheless, the political and social instability in the region, the lack of investment in infrastructure (except for Morocco), and the lack of reforms in the banking and financial system are key challenges holding back multinational companies. In Tunisia in particular, social unrest is becoming a major obstacle to the country’s economic potential, especially as the Labor Union openly opposes plans to reform public enterprises, reduce subsidies and cut budgets. Strikes are expected in the coming months as the government prepares its budget plans for next year. The three countries look set to suffer from the Ukraine war’s negative effects more than they could benefit from increasing relocation of production. Companies looking to expand their presence in the Maghreb must weigh the region's potential against the threat of political instability, structural weaknesses and sluggish infrastructure investment.

Executive Summary Amid a number of home-grown crises, the Chinese Communist Party (CCP) faces uncertainties about its future course, with more clarity on both personnel and program expected from the party congress in mid-October. Under enormous pressure to maintain prosperity, the CCP has increased political interference in the economy, effectively regarding domestic institutions and companies as useful instruments to maintain its power. China increasingly relies on “leverage countries” to assert its interests, using dependent states to counter the West’s global dominance and increasing presence in the Indo-Pacific. Implications for International Businesses Continued stringent and sometimes arbitrary lockdown measures constitute an ongoing risk, especially for the manufacturing industries. Increased policy intervention is likely in areas like joint ventures, as highly indebted regional governments seek to implement their policies as prescribed by the central government. Planned financial reforms in China that restrict foreign firms’ access to Chinese capital could require higher cash flows from foreign firms operating in China. State of Play Beijing is struggling to address home-grown crises With the 20th Party Congress of the CCP scheduled for October 16 rapidly approaching, controversies are mounting over the party’s – and, thus, the country’s – future course. For one, there is dissent over personnel issues, mainly whether President Xi Jinping should serve an unprecedented third term as party leader. For another, some observers wonder aloud whether a return to the reform agenda of the 1980s and an opening-up of politics is imminent. That is because current decision-making processes are hampered by a deepening economic crisis and the still-rampant Covid-19 pandemic. The CCP has de facto abandoned the economic growth target for 2022 and not set new targets for 2023, which is a first for a party that wants to maintain confidence in its economic leadership. The economy is experiencing a steady decline and risks further inflationary dynamics. Public debt continues to rise and now extends across all provinces, making policymakers less and less able to intervene financially. For companies operating in China or with close ties to the country, this results in growing uncertainty about the political environment. For business operations, arbitrariness in dealing with lockdown measures is increasing, which means risks for the manufacturing sector in particular. A likely increase in the hostility of Chinese foreign policy towards the West may pose structural hurdles for European companies, in particular to secure a permanent foothold in China. Moreover, geopolitical tensions regarding Taiwan as well as China’s arms buildup vis-à-vis Japan, South Korea and other East and Southeast Asian countries increase long-term risks. Especially manufacturing and R&D activities that can be linked to supply chains in dual-use areas are becoming sensitive, both for Beijing and for Western governments. Tighter restrictions of a political nature will be the result on both sides. Key Issues Competing camps to determine China’s course at party congress The current Chinese system is moving under enormous economic pressure toward a state capitalist system with increased political interference. For the past forty years, economic performance has been the main source of the CCP’s legitimacy. The party now faces the difficulty of redressing the imbalances caused by China’s growth model while continuing to grow fast enough to maintain political stability. In light of this, Xi Jinping has tried to turn as many stakeholders as possible into servants of overriding party interests. While competing groups exist within the party, none dares to question the overall raison d’état – the sustained leadership of the country by the party. As various corporate crackdowns over the past years have shown, the CCP is willing take any risks to achieve its goal of retaining power. The political instability is compounded by the government’s dilemma to maintain a vibrant economy while keeping pandemical spread under control. In fact, the urgency to manage multiple crises has only increased: from handling various bank crises while simultaneously saving giant real estate firms from bankruptcy; to dealing with mass unemployment reaching new highs and the potential for social unrests; to preventing foreign investors from fleeing China while weighting the competitive threat these companies pose to withering Chinese firms. This trend of hastened decision-making, often in seemingly opposite directions, will likely continue at least till the Party Congress next month. Whether it will also go beyond it, mainly depends on whether there will be radical political changes of the likes of introducing major reforms, and on possible personnel shifts. In particular, the new composition of the Politburo and its Standing Committee will be relevant. Opposition to Xi is growing as the economy is slowing; however, no one has clearly emerged as the spearhead of this opposition. This makes the current political situation highly risky, especially for government officials and party leaders, as they fear being removed if they choose the wrong side. A nationalist approach to maintain power creates global tensions Driven by internal crises, the CCP has for many years pursued a nationalist foreign policy to maintain the legitimacy of its claim to power. Against this backdrop, the Taiwan issue may be the most persuasive leverage to demonstrate the party’s determination to serve a nation yearning for historical redemption. Moreover, the portrayal of China as a rising great power is increasingly becoming a sacred principle that must be upheld, though without causing an open conflict that China could ill afford at present. This approach was on display in Beijing’s carefully calibrated acquiescence of Russia’s attack on Ukraine and even more so in its – bombastic, but also largely symbolic – response to the visit of Nancy Pelosi, Speaker of the US House of Representatives, to Taipei in August. Guided by such nationalist doctrine, Chinese foreign policy will most likely continue to pursue to some degree a demonstrative confrontation against a “new” West that is once again broadly united behind the United States. As countries like France and Germany show a growing readiness and determination to join the Indo-Pacific Strategy of the US, Japan, Australia, and India (“the Quad”), Beijing is shoring up support from its partners. However, it does not view states like North Korea or Pakistan as allies in a classical sense, but rather as “leverage countries” that it can use to better position itself. China, as it happens, does not have a single reliable ally, and instead aims to strategically exploits its relations with such countries to assert its interests vis-à-vis the West. Even under a new CCP leadership, a fundamental confrontation with China remains in the cards, and every stakeholder, including companies, will have to choose a side. The exchange of sanctions against major Western companies like Nike, Adidas, H&M, and the increasing coercion against Western high-tech companies to hand over their source code to the Chinese authorities already point in this direction. This will intensify, especially for German companies, if Berlin, as the Ministry of Defense announced, will increase its military presence in the Indo-Pacific to counter China’s expansion. The recent meeting of the Shanghai Cooperation Organisation, which Beijing informally leads, was also instructive: In Xi's first foreign visit since the onset of the pandemic, he provided moral support to his Russian counterpart, coupled with mild criticism over the Russian army's rapid retreats in Eastern Ukraine. Moreover, Iran – another supporter of a "multipolar", i.e. non-US-dominated world – was formally admitted to the club. While primarily being a tool for China to manage security in its neighborhood and advance its economic interests in Central Asia, the organization is also a convenient tool for China to strengthen an anti-Western alliance

Executive Summary Sub-Saharan Africa’s investment landscape is becoming more diverse as the digital economy, financial services, mobility, logistics, and health tech are attracting more local and foreign investments. The region is a growth market with a 4% increase in GDP in 2021 and expected 3.6% in 2022, an increase in the number of SMEs and an annual infrastructure gap of USD 100 billion. China surpassed the EU in 2020 as Sub-Saharan Africa’s largest trade partner, not least thanks to its Belt and Road initiative, which the G7 now aim to counter with a Partnership for Global Infrastructure and Investment. Implications for International Businesses The new free trade area will harmonize policies on investment, competition, and intellectual property rights, and reduce the risks of shifting regulations to attract more FDI and boost foreign trade. The political uncertainties around upcoming elections In Nigeria and the Democratic Republic of the Congo (DRC), two resource-rich regional powers, have an impact on regional security and economic policy. The region’s startup ecosystem is expanding into sectors like climate control, edutech, healthtech, and agritech, in addition to existing unicorns such as digital payment infrastructure companies Flutterwave and Interswitch and global talent network Andela. State of Play World powers courting a continent on the rise Sub-Saharan Africa has traditionally been a market for American and European goods and a fertile ground for the promotion of US strategic interests. However, US and EU investments in Africa are often tied to strict fiscal and political conditions. China, in turn, takes a more pragmatic, trade-driven approach to engaging with the region. With its Belt and Road Initiative, it has aggressively expanded its economic interests over the last decade. It sees the region as a source of key raw materials, such as cobalt, platinum and oil, as well as agricultural products. A large population offers relatively cheap labor and a growth market for Chinese goods. China has expanded access to the Chinese market for African exporters and has now replaced the EU as Sub-Saharan Africa’s largest trade partner. Besides being a sought-after trading partner of the world powers, Africa has begun to develop its own form of economic integration. The African Continental Free Trade Area (AfCFTA) has begun its pilot phase in September 2022 comprising seven states: Rwanda, Cameroon, Egypt, Ghana, Kenya, Mauritius, and Tanzania. As the agreement gets implemented over the coming years, participating countries will gain access to regional markets at preferential tariff rates, and identify comparable policies in customs, logistics, and legislation to ultimately facilitate continent-wide integration. At the same time, insecurity has been on the rise in the region over the past five years, with a direct impact on irregular migration, transnational crime, and global terrorist activity. The Western Sahel region has become a hotbed for terrorist activity linked to the Islamic State; similarly, there has been a marked uptick in such activity in eastern Africa. Potential threats to progress include conflicts like the civil war in Ethiopia and military coups like recently in Mali, Burkina Faso, Chad, Sudan, and Guinea. South Africa’s economy has been negatively affected by social unrest as a result of the prosecution of former President Jacob Zuma, poverty and unemployment. Generally, graft, inflation, and weak institutions are the main sources of risk in the region. Key Issues The region’s growing geostrategic importance drives the quest for closer partnerships With substantial oil and gas reserves, Nigeria, South Africa, and Angola are among the most important resource-rich countries in Sub-Saharan Africa. Other countries such as the DRC produce strategic minerals like lithium and cobalt, which are in high demand by both Western and Chinese manufacturers. Still, the region consistently ranks low in global development indices and includes some of the world’s poorest countries, characterized by corruption, political instability and a lack of infrastructure. China is present in almost all countries but seems to focus on the resource-rich ones with weak democratic structures, such as Angola, Zambia, and the DRC. It also makes inroads in such larger countries as Nigeria and Kenya, investing in flagship projects like upgrading the Standard Gauge Railway between Kenya’s capital Nairobi and the port city of Mombasa. China’s growing presence opposes Western interests in the region. The US has raised questions about Chinese debt diplomacy and loan sustainability, starting a Prosper Africa initiative in response to Beijing’s growing strategic advantage. Yet, Sub- Saharan countries ignore US concerns and continue to pursue deals with China because of its track record of engagement, regional economic pressures, and a lack of alternative financing on similar terms. The disproportionally high number of abstentions and non-votes on the UN resolution condemning Russia’s invasion of Ukraine shows that many African countries are unwilling to lean too heavily to one – or, indeed, to the Western – side. China’s BRI investments are projected to increase, and Russia and India also have stakes in the region. This makes it even less likely that the G7 investment initiatives will reverse the trend of waning Western influence. Competition between China and the West will provide more financing opportunities for firms, but could weaken fiscal discipline, increase corruption, and worsen the debt profile of a number of countries. Sub-Saharan “rising stars” offer plenty of economic opportunities South Africa and Nigeria have long been the leading economies in the region, accounting for about 40% of Sub-Saharan Africa’s GDP. However, both countries have also been plagued by high levels of corruption, which has limited their ability to maximize revenues from mineral resources and use them to meet the urgent needs of the population. Despite recent inflationary pressures, countries such as Ghana and Rwanda are among the rising economic stars, having consistently demonstrated a degree of fiscal discipline and growth. Ghana’s top exports are oil, gold, and cocoa, while Rwanda’s economy has benefited from investments in tourism, agriculture, and mining. In addition, Kenya and Côte d’Ivoire are buoyant with diversified economies driven by agricultural exports and investments in construction, infrastructure, and other sectors. Kenya is East Africa’s economic hub and Cote d’Ivoire’s economy grew by an average of 8% annually between 2012 and 2019. In Côte d’Ivoire, the government is currently implementing economic reforms to restructure the banking sector and broaden the tax base. The substantial infrastructure gap in Sub-Saharan Africa offers great investment opportunities for international firms. As AfCFTA begins to be implemented, investing in a single African country can potentially provide access to a continental market of 1.3 billion people. By linking the low tariffs, ease of doing business, tax incentives, and regional integration offered by AfCFTA with the new infrastructure initiatives of the US, EU and G7, Western companies can tap into medium-risk opportunities in various sectors. The digital and knowledge economies are also promising, as the region is home to a young population that increasingly uses the internet to shop, trade, and acquire skills relevant to a global market. Potential risks for Western companies seeking to invest in Sub-Saharan Africa include political instability (as recent coups possibly indicate a trend), corruption (especially in the oil sector in Nigeria and Angola), inconsistent government policies, and in some cases difficulties in repatriating profits due to financial regulations, e.g., for foreign airlines in Nigeria due to stricter forex controls.

Executive Summary Polls significantly underrated support for President Bolsonaro and his allies running for Congress, the Senate, and Governorships, but Lula remains the favorite to win the presidency on October 30. Profoundly polarized, Brazil faces the risk of political violence in the runoff’s aftermath and Bolsonaro’s contestation of the result if he loses, potentially compromising governability for years. Whoever wins will face widespread discontent and anti-incumbency sentiment; Bolsonaro, if re-elected, will try to further control the judiciary and undermine checks and balances. In foreign policy, Lula would reconnect Brazil with the West; Bolsonaro would increasingly depend on China. Implications for International Businesses Stagnating or declining economic activity over the past decade coupled with a weakened currency and the pandemic’s toll indicate a difficult macroeconomic environment, no matter who wins. With recently increased social spending likely to become permanent, the next president inherits a challenging fiscal situation. Low approval ratings additionally limit the political scope for spending cuts and reforms. If victorious, Bolsonaro would slowly continue reforms to reduce the cost of business,but Brazil's OECD accession and ratification of the EU-Mercosur trade deal remain unlikely. Lula would engage the country more on climate change but less so on further privatizations and trade liberalization. State of Play A steady business environment despite political instability Despite their fundamentally different political views for Brazil, neither Jair Bolsonaro nor Ignacio Lula da Silva would pursue and visions economic policies as president that negatively impact the country’s business environment. Bolsonaro would continue a slow but steady liberalization policy that is supported by local business elites. Yet, his increasingly poor reputation in the West and the expectation that a second term in office would lead to a deterioration of Brazilian democracy, environmental policies, and the rule of law, with clear drawbacks for investors. As long as Bolsonaro is president, EU leaders are unlikely to ratify the EU-Mercosur trade deal or green-light Brazil’s accession to the OECD. Moreover, a continuation of current environmental policies increases the risk of Western consumers boycotting Brazilian products. Lula, in turn, is expected to move further to the center, e.g., by appointing a mainstream Minister of the Economy and respecting the independence of the central bank. Putting the Mercosur trade deal to work, however, may prove difficult, as his Workers Party has signaled it wants better protection for Brazilian industry, but the EU is unwilling to reopen negotiations. Lula could also delay Brazil’s OECD accession given opposition among his nationalist, anti-neoliberal base. A long-awaited tax reform, facilitating the unwieldly tax code, is conceivable under both candidates. Key Issues Democratic erosion as both a short- and medium-term risk About a quarter of Bolsonaro voters are so radicalized that they do not want their candidate to concede or accept defeat. As Bolsonaro will most likely lose the runoff, the big question is whether his core followers – roughly 12 million people – are ready to turn the page or would attempt to prevent the transition of power. In this case, the Brazilian army will play a decisive role. While they have in the past equivocated rhetorically and at times defended Bolsonaro's bogus claims about bugs in the electoral system, an outright coup is improbable. More likely, even with moderate post-election violence and a non-cooperative stance by the outgoing administration, the transition of power will take place. A more significant risk is that millions of Brazilians will not recognize the legitimacy of the next president. Signs indicate that at least part of the opposition will try to unseat a President Lula from the outset. In recent years, the executive office has continuously lost power to the legislature, so that, in the second half of his term, not Bolsonaro, but Arthur Lira, president of Congress, was the most powerful politician in Brazil thanks to his final say on all budgetary matters. In addition to thethreat of extreme polarization,Brazilian democracy also faces perennial political instability caused by a half-baked parliamentarism forcing the president to hand over extraordinary amounts of money to Congress to avert impeachment. In June, for example, congressmen willing to support Bolsonaro received over U$ 900 million in funds to be spent largely without oversight. Unless the next president regains the capacity to steer the government, political paralysis is set to prevail, inevitably undermining public confidence. This sets the stage for authoritarian-minded leaders to call for a concentration of power in the executive. The election result will determine Brazil’s geopolitical positioning Western government officials and business elites tend to welcome Lula’s possible return to the presidency, as the former president is widely seen as more predictable and pragmatic than Bolsonaro. If elected, he would work to quickly overcome Brazil’s current diplomatic isolation in the West. In particular, he would resume and intensify environmental cooperation with the West. (such as the Amazon Fund financed by Norway and Germany), which has largely ceased under the incumbent. However, on the growing tensions between Russia and the West, Brazil and Europe will inevitably disagree, as neither Lula nor Bolsonaro are willing to abandon the country’s neutrality. Bolsonaro visited Moscow days before the invasion, and Lula affirmed in a TIME Magazine interview that Zelensky was “as responsible for the war as Putin”. Similarly, Brazil would take a neutral stance in a possible crisis with Taiwan. Brazil has long sought to maintain cordial diplomatic relations with all major powers, including China. The intensifying great power politics, the “tech war” between China and the US, and the possible emergence of a “digital iron curtain” between two technological spheres of influence make the implementation of such a strategy of “non-alignment” increasingly difficult. Irrespective of the election outcome, Brazil is set to remain committed to the BRICS group and to counteract any of its members’ diplomatic isolation. There is a cross-party consensus that Brazil stands to benefit from strong relations to China and Russia, which it can use to balance US influence in Latin America. Although Bolsonaro initially ran as an anti-China candidate back in 2018, Trump’s departure from the White House weakened his “anti-globalist” and “anti-communist” foreign policy. Faced with near-complete isolation in both the West and China, Bolsonaro has ceased his attacks on Beijing. He silenced his party’s anti-China faction, and instead chose “globalist elites” and leftist leaders in Latin America and the West as his main targets. The Chinese government now sees the crisis in the bilateral relations as largely resolved and considers Bolsonaro an ally against the West. With him in office, Beijing has far fewer competitors in its quest to consolidate its strategic influence in Latin America’s largest nation.

Executive Summary Rishi Sunak has taken over as prime minister, after a chaotic economic experiment to boost growth through aggressive, but unfunded tax cuts spooked the markets. Trying to rebuild both investor and voter confidence in the Conservative government, he faces continued political and economic turmoil as he implements unpopular spending cuts. With little time for international matters beyond Ukraine, Sunak will focus on ensuring the UK does not become an ungovernable country with a dysfunctional economy. Implications for International Businesses At a time of economic crisis, the UK is facing a similar period of austerity as after the 2008 financial crisis, which is likely further weaken growth forecasts. Corporation tax will rise from 19% to 25%, with further tax rises being likely. Adding to the uncertainty about the UK investment allowance, this dissuades private sector investment. Tensions with the EU are likely to ease, but disagreements around the execution of Brexit, in particular the Northern Ireland Protocol, will remain a source of friction with Brussels. State of Play After the shortest premiership in history, a crisis A ‘mini-budget’ presented in mid-September by then Chancellor of the Exchequer (finance minister) Kwasi Kwarteng contained £45 billion in unfunded tax cuts and plunged the UK into economic turmoil. The Bank of England was required to intervene with £65bn to support a large slice of the UK’s pension sector left vulnerable by the bond market’s instability. Moreover, the yield of long-dated UK government bonds known as ‘gilts’ rose sharply from 3.5% to 5%, adding billions to the UK’s borrowing cost. Kwarteng was sacked on October 14, and his replacement, Jeremy Hunt, immediately tore up most of his ideas. On October 20, after only 44 days in office, Liz Truss announced her resignation as Prime Minister, and former Chancellor Rishi Sunak was chosen by Conservative MPs to replace the party rival who beat him in the leadership race this summer. Having repeatedly warned against Truss’ debt-driven growth agenda, Sunak will send Hunt to announce a medium-term fiscal plan by the end of the month. This will likely include big spending cuts and tax increases to bring the fiscal situation under control, ushering in a period of austerity similar to that which followed the 2008 financial crisis. Key Issues The new government will bring macro-economic stability but faces significant challenges Prime Minister Sunak’s priority is to restore investor confidence in the UK and voter confidence in the Conservative Party. Neither will be easy. Both he and his Chancellor want to prove to the markets that the government is a responsible debtor in order to reduce its current borrowing costs. But Sunak faces a bleak winter of difficult choices because of spiraling inflation, stagnating incomes, labor shortages, an increase in strike action, a record seven million people waiting for hospital treatment, a backlog of 61,000 criminal cases in the court system, the possibility of energy blackouts over the winter months, a government-funded energy support package for households and businesses due to end in March when energy prices will increase significantly, and decades-long structural problems of low productivity coupled with insufficient investment in skills, infrastructure and innovation. Disquiet in public and media about yet another change of prime minister continues – Sunak is the third officeholder in just two months. Calls for an early general election before January 2025 are growing louder, not just from the opposition but also the general public. However, current polling points to the loss of more than half of the Conservatives’ 357 seats, thus making a new poll a suicide mission. Also, at a personal level, Labour leader Sir Keir Starmer is thought to be the better prime minister by 38% of the people compared to 29% for Sunak. The latter still has something going for him, besides appearing as a ‘steady hand’ throughout the latest turbulence and as the one who oversaw a generous furlough scheme during the Covid-19 pandemic . He is also, not insignificantly, the first UK prime minister of Indian-origin and the first Hindu to occupy the office. However, a former Goldman Sachs banker and hedge fund manager who is married to a billionaire’s daughter, Sunak can appear to be aloof when regular Britons are wrestling with a cost-of-living crisis and do not know how to get through the winter. Struggling to avoid irrelevance as an international partner Sunak will also try to bring clarity to the UK’s international policies to restore the country’s reputation, as investors, politicians and analysts fret about the UK turning into a dysfunctional economy and state. Despite being a leading supporter of Brexit, the new prime minister is expected to follow a conventional, less controversial approach to international affairs. Mindful of growing public support for a more pragmatic rather than ideological relationship with the EU and given the state of the economy, he wants to avoid a trade war with Brussels. Nevertheless, Euroscepticism remains powerful within parts of the Conservative party, as the difficulty of ‘getting Brexit done’ is one of the reasons behind the succession of Conservative prime ministers since the EU referendum of 2016. Sunak will continue the UK’s participation in the newly established European Political Community of EU and Non-EU members. The UK’s strong support for Ukraine will remain, but Sunak has only committed to defense spending not dropping below 2% of GDP so some cuts are expected. Despite this, relations with the USA will remain close, especially on military cooperation and over China, with Sunak proposing a ‘NATO-style technological alliance’ against Beijing’s ambitions. However, prospects for a UK-US trade deal have faded. Whether his Indian roots and prominent family – his father-in-law is the owner of the global IT firm Infosys – will win him any friends in the Commonwealth or, more broadly speaking, the Global South will depend on his success at home. The “levelling up” that his predecessor-by-one planned to administer to the UK’s de-industrialized areas may soon be something that the entire country needs.

Executive Summary In the Western Balkans, slow EU accession perspectives and investments are colliding with Russia’s historic influence and China’s new-found business pragmatism. Although Russia cannot offer tangible benefits to the region, it maintains a strong grip on local leaders that exploit anti-Western and Eurosceptic public attitudes. The war in Ukraine intensifies competition between the EU-led Three Seas Initiative and China’s Belt and Road Initiative. Implications for International Businesses The EU’s Economic and Investment Plan (EIP) enables sustained development of the region, but effective investment management is needed to keep China from dominating the green energy sector and to minimize engrained corruption. Serbia and Bosnia and Herzegovina are the only two states to not have adopted EU sanctions against Ukraine, allowing for Russian-Chinese coordination in the region. Over time, the repercussions of the war in Ukraine will negatively impact the business climate in the region unless the activities of China and Russia are kept in check. State of Play Russia still has soft power and economic clout in Western Balkans The Western Balkans stand at the crossroads of rivalling powers. The EU has focused on post-conflict reconstruction and stabilization since the mid-1990s, whereas NATO solidified its presence through the membership of Albania (2009), Montenegro (2017) and North Macedonia (2020). However, the region’s slow progress towards EU accession has undermined the EU’s influence. Not only has this allowed Russia to boast its cultural, religious and political ties, but also to remain a dominant provider of energy to some countries, such as Serbia. China, in turn, has taken advantage by adopting a pragmatic, trade-driven approach. Meanwhile, Turkey is bolstering its economic and financial presence, building on its historical legacy as much as on its companies’ presence. The war in Ukraine has raised the stakes for the above-mentioned players and negatively impacted the region’s economy, security and political stability. This mostly concerns the four heartland states – Bosnia and Herzegovina, Kosovo, North Macedonia, and Serbia. The growing insecurity in the Black Sea region elevated the significance of the Western Balkans as alternative pan-European transport corridor for two competing strategic initiatives: The Three Seas Initiative and Land-Sea Express Route (part of the Chinese Belt and Road Initiative). This geopolitical dynamic has provided local elites with more maneuvering space in the context of the rising inflation and energy prices. Thus, Bosnia and Herzegovina and Serbia, unlike the other states in the region, have not adopted the EU’s sanctions against Russia. Instead, they remain open to both EU pre-accession funds and continued Chinese investments, especially in the energy sector and transport infrastructure. Key Issues As disillusionment with Europe grows in the region, the clash of systems is intensifying The Ukraine war and its repercussions have turned the Western Balkans into a political and economic frontline between Russia and the EU, and with it the United States. This confrontation also benefits China and Turkey respectively, thus giving them a geopolitical edge. On the one hand, Russia’s setbacks in Ukraine have also taken a toll on Moscow’s economic perspectives in the region. Even among the Christian Orthodox population of Serbia and Bosnia and Herzegovina, the perception of dwindling Russian influence has taken hold. On the other hand, and precisely due to the lack of more tangible benefits on offer, Moscow relies heavily on operationalizing the idea of a Serbian World as a conduit for the Russian World concept of unity among Christian Orthodox people. At the end of February 2022, Russia dispatched a special envoy to Belgrade to coordinate the Russo-Serbian activities in the region. The latest threat of Serbian President Aleksandar Vučić on December 14 to dispatch Serbian army units to Northern Kosovo amidst rising tensions between Belgrade and Pristina exemplifies the military component of promoting these concepts. Pivotal for the realization of the latter is the exploitation of the nexus between strategic corruption and the malign interplay of the security services of both states. China, in turn, has taken advantage of Russia’s shrinking economic presence in the region. It is bent on continuing its infrastructure projects along the Skopje-Belgrade-Budapest axis. Chinese investments in renewable energy projects are at odds with Russian vested interests in gas and oil supplies to the region. While such investments do not create enough jobs, they guarantee profits for the local elites through the mandatory buy-back of electricity from renewable energy sources by the state. Lack of EU investment risks leaving the region to Russian and Chinese influence The EU’s substantial €3.2 billion investment package for the Western Balkans as part of the 2022-2027 €30 billion EIP is an expression of the EU’s continued commitment to the region. Together with other EU investment initiatives, it offers opportunities for infrastructure development and the digital economy, despite high emigration rates from the region. The EU program for Competitiveness of Enterprises and SMEs through the Western Balkans Enterprise Development and Innovation Facility and EU-led regional integration also provide medium and long-term incentives for businesses and an improvement in the business climate. Importantly, these financial pledges are now underpinned by granting EU candidate status to Bosnia and Herzegovina, which allows for the protection of EU funds, provided Chinese and Russian firms’ access to these funds is limited. Adjusting to the ripple effects of the war in Ukraine, China has shifted the focus of its Belt and Road Initiative from Central and Eastern Europe to the Western Balkans, prioritizing the Land-Sea Express Route, a transport corridor connecting Europe and Asia. Chinese infrastructure projects are in direct competition with the Trans-EU Transport Routes No.10 (Thessaloniki-Skopje-Belgrade-Budapest), which is still in the planning and development stages, and No.8, which connects the Black Sea with the Adriatic Sea and is funded through the Connecting Europe Facility funding mechanism. Although Serbia became a partner in the Three Seas Initiative in 2021, other countries in the region were left out. Local elites in Serbia seem inclined to prioritize cooperation with China at the expense of the EU initiative. Serbia, for one, is on the verge of signing a free trade agreement with China around the end of 2022, consolidating its position as Serbia’s second largest trading partner after the EU. In Bosnia and Herzegovina, Serbian and Croatian leaders have increased their cooperation to facilitate Chinese investments. In the energy sector, for example, China’s shift towards green energy projects is evident in the growing number of companies such as Clenergy and Geminox trying to enter the regional market. In the long run, this could enable China to remotely control the renewable energy production via the 5G network it also runs. The above-mentioned projects would preposition China for future reconstruction efforts in Ukraine, e.g. by providing the necessary link to infrastructure projects in the Central European and Baltic States. China is actively involved in the development of the Land-Sea Express Route that connects ports of the Baltic Sea, the Adriatic Sea, and the Black Sea. The interaction of Russia and China negatively impacts the business climate in the region. Without financial support, Moscow’s strategy aims to exploit public disillusionment with the slow EU accession process, especially in Slavic-majority countries like Serbia, North Macedonia, and the Republika Srpska in Bosnia-Herzegovina, where local elites heavily depend on Russia. The endemic corruption that accompanies these ties raises concerns about the management of expenditure on any EU-funded project.